Sunday, January 25, 2009

Scientific Proof - The Free Market is Inefficient

The Free Market is considered an efficient economic system where supply and demand are regulated by price. The Wikipedia article quotes Friedrick Hayak: "a more efficient allocation of societal resources than any design could achieve."

Well I am now in possession of written documented irrefutable proof by a scientific journal that the common perception that the Free Market system is economically efficient is a fraud. Of course the preceding statement, as is the title, is a tease to get you to read this. Read on.

In its February 2009 issue, the Scientific American had an article, "Detours by Design", or "how closing streets and removing traffic lights speed up urban travel" by Linda Baker. (Alternate Source since the Scientific American has not posted the full text. Hopefully they may post this article at a later date.)

So how does one make the connection that closing streets proves that the Free Market is inefficient? To paraphrase Ms. Baker: "Researchers explain that drivers seeking the shortest route to a given destination eventually reach what is known as the Nash equilibrium, in which no single driver can do any better by changing their driving strategy unilaterally." The central concern is that the Nash equilibrium is less efficient than the equilibrium reached when drivers act unselfishly.

Ms. Baker goes on to write: "The solution hinges on Braess's paradox, Gastner says, "Because selfish drivers optimize a wrong function, they can be led to a better solution if you remove some of the network links," he explains. Why? In part because it makes it more difficult for individual drivers to choose the best (and most selfish) route.""

This article demonstrates that: Unregulated selfish behavior is less efficient than regulated Free Market behavior in benefiting society. Of course, I don't wish to advocate unlimited regulation. There is also the issue of "freedom to choose" since regulation would deprive you of your freedom to choose. My point continues to be that unfettered selfish actions end up being self-destructive to both the individual and society. If one does not want regulation, then one needs to act responsibly. My call is, actually not for more regulation but, for real social responsibility by those who are our corporate and elected leaders.

Most free market advocates claim that an unregulated economy is efficient because the sum total of each participant's selfish actions make for an efficient market. While the concept that the sum total of selfish actions make for an efficient market has much appeal, there is an abundance of anecdotal evidence that demonstrates that the free market really is not that efficient. For example, most of us have gone to a hardware store to fix something simple, like a piece of plumbing, only to find that that piece is no longer being made or the design has changed. In fact when you look down the product aisle they all look virtually the same, but due to subtle variations are not interchangeable. Consequently you end up visiting the store more than once, paying more for a whole new fixture that you really did not need and perhaps even paying additional money for someone to install it. Paying for a whole new fixture, when a small part will do, is an economic inefficiency that has a negative societal economic cost.

Then there is the meltdown of our financial system, clearly an example of how unfettered selfish behavior has resulted in significant adverse economic stress to both individuals and society.

While one can quibble with the hardware store example, this analysis can be easily applied to issues such as network neutrality, privatization of the spectrum, proprietary products, and the implementation of Digital Rights Management (DRM). At last - I have "proof" that reasonable regulation will benefit both the individual and society!!!!!

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